Alaskans await progress on Palin pipeline plan

When a pipeline might be built remains a giant question for Alaskans. The Alaska Department of Revenue says it may never happen under Palin's plan. Sarah Palin hit the vice presidential
campaign trail last year and touted what Alaska could
provide for the rest of America-a natural gas pipeline to
help lead the country to energy independence.

When a pipeline might be built remains a giant question for
Alaskans who need the project to support a vulnerable
economy and for the Lower 48 states that need the gas, and a
petroleum economist who spent more than 25 years in the
Alaska Department of Revenue says it may never happen under
Palin's plan.

The former governor's proposal used faulty accounting to
reach the flawed conclusion that a pipeline owned by a
third-party would be more profitable than one owned by major
gas producers, who must be on board for any project to be
successful, wrote Roger Marks, in his paper, "Why
America May Not See Alaska Natural Gas Soon," published
last month in the Journal of Economic Issues.

Sarah Palin hit the vice presidential
campaign trail last year and touted what Alaska could
provide for the rest of America-a natural gas pipeline to
help lead the country to energy independence.

When a pipeline might be built remains a giant question for
Alaskans who need the project to support a vulnerable
economy and for the Lower 48 states that need the gas, and a
petroleum economist who spent more than 25 years in the
Alaska Department of Revenue says it may never happen under
Palin's plan.

The former governor's proposal used faulty accounting to
reach the flawed conclusion that a pipeline owned by a
third-party would be more profitable than one owned by major
gas producers, who must be on board for any project to be
successful, wrote Roger Marks, in his paper, "Why
America May Not See Alaska Natural Gas Soon," published
last month in the Journal of Economic Issues.

Palin in 2006 took on incumbent Frank Murkowski, a Republican
governor whose version of a natural gas pipeline project was
hatched behind closed doors and perceived as a giveaway to
major petroleum companies. Palin crushed Murkowski in the
Republican primary. She promised openness in pipeline
deliberations and control by Alaskans.

The result was the Alaska Gasline Inducement Act, known by
its acronym AGIA. The law promised $500 million in seed
money to a pipeline company that would meet performance
requirements: getting the project to an "open
season," a critical milestone where shippers can
reserve space in a pipeline, and then applying for a federal certificate.

Following Palin's recommendation, the Alaska Legislature
in 2008 awarded a license to pipeline company TransCanada
Corp. Exxon Mobil, one of three major producers in Alaska,
announced in March it would partner with TransCanada to
advance a pipeline. The other two major Alaska producers,
ConocoPhillips and BP PLC, proposed their own pipeline
without the incentives.

A telling sign of the industry view of the Palin plan, Marks
said, was that it attracted just five bidders. Three had
virtually no assets and four were judged "non-responsive."

"In other words, it received just one bid," Marks said.

Provisions of Palin's pipeline law run counter to
commercial arrangements that producers need as gas shippers,
Marks said. Under Palin's law, the state will reimburse
TransCanada for 50 percent of its expenses as it prepares
for next year's open season and 90 percent of its
expenses afterward. According to Marks, that motivates
TransCanada to skimp on engineering before the open season:
Shippers will be asked to make billion-dollar, decades-long
commitments for space on the proposed pipeline with a
low-quality estimate of its eventual final cost.

The TransCanada application calls for moving Alaska gas into
the company's Alberta Hub, pipelines that transfer gas
from one part of Alberta to another, where it can go on to
pipelines to other North America markets. Gas producers are
experts at marketing, Marks said, but under Palin's
law, a pipeline company is determining the market.

The Palin administration may have downplayed those commercial
concerns, Marks said, because their economic model showed a
third-party pipeline to be more profitable to gas producers
than a pipeline the producers themselves built, and which
has not been forthcoming for three decades.

But producers ultimately pay for any pipeline either by
building it themselves or by committing to long-term
contracts to use it to move gas, Marks said, and it's
viability is not dependent on how it's financed.

Revenue Commissioner Galvin said Marks is wrong. Marks'
perspective is based on the premise that the Alaska natural
gas pipeline is economically marginal and that North Slope
producers must be enticed to pursue it.

The Palin plan, Galvin said, projects long-term natural gas
prices that will allow producers to earn billions off North
Slope gas. They're holding off support, he said, so
they can negotiate valuable concessions from the state. The
requirements are in line with commercial terms they accept
elsewhere in the world, he said.

Marks expects at most conditional commitments next year. On
that, Galvin agrees, but sees it as a positive.

"The conditions will provide us with a map as to what
needs to be done in order to make the project ultimately
successful," Galvin said. "That's what the
open season is about."

Ex-Gov. Murkowski is among the skeptics. He has suggested
paying off TransCanada for their expenses and going back to
a pipeline plan with producers.

The BP-ConocoPhillips pipeline plan calls for spending $600
million to get to its own open season next year. All three
major producers, including Exxon Mobil, want assurance that
Alaskans will not raise tax rates after companies commit
billions to a pipeline.

Critics such as Rep. Ramras see the chances of an Alaska gas
pipeline erode a bit with every report of abundant shale gas
from the Appalachians to Louisiana to British Columbia.

Ramras said he's frustrated that some Alaskans will
consider Palin's pipeline process a success if
TransCanada merely conducts an open season. He sees a big
difference between a finished pipeline and an open season
that obtains no commitments.

"If it's a failure," Ramras said of the open
season next year, "then AGIA will be a failure, period,
and we're not reconciling ourselves to that. Instead we
are enjoying some Orwellian reinterpretation of a business
transaction being recast like a recreational 10K race, that
what's more important is going through the process than
reaching a desirable outcome."